Compensation Design in the Modern Workplace
A modern workplace and business world requires a contemporary approach to managing and rewarding human resources — no second thoughts about that. As organisations deviate from ratings-based annual performance reviews, HR leaders seek unconventional methods to build a structured compensation process and drive positive business outcomes.
Here’s the nitty-gritty of compensation design and why it's important for a company.
Breaking Down the Definition
Employees receive compensation from a firm in return for the work performed. It’s vital to understand that pay and compensation are, although similar, quite different in nature. Compensation is more than the monetary rewards provided to an employee.
A compensation design supports a company’s strategic plan and business goals and rewards employees for their efforts in terms of monetary gains or other incentives. By aligning these rewards with the company’s strategy, the organisation can inspire its human resources to deliver superior results. However, it’s not easy as it sounds.
Pay-related decisions can have a major impact on a company. When done right, compensation aligns employees’ behaviours with the firm’s strategy and generates better performance. In contrast, the consequences can be adverse when managed poorly: loss of key talent, demotivation, misaligned objectives as well as poor shareholder returns. This places key importance on getting compensation right and the first step is always to start with clear strategies.
The Four Facets of Compensation Design
Four dimensions contribute to devising a compensation design system: fixed vs variable, short-term vs long-term, cash vs equity, and individual vs group. A firm’s choice may be influenced by its strategic objectives, ability to attract and retain talent, ownership structure, culture, corporate governance and cash flow. Here’s defining the four dimensions:
Fixed vs variable - total compensation is made of base salary with short-term and long-term incentives.
Short-term vs long-term - the extent to which variable compensation is paid out in the year it is awarded or deferred and paid over a future period. Short-term variable compensation typically takes the form of cash while long-term is delivered in equity.
Cash vs equity - the mix of cash compensation and equity compensation which is often determined by business maturity.
Individual vs. group - companies with a high degree of personal accountability tend to link compensation with individual triumphs while companies that focus more on organisational results base compensation on the overall firm’s performance.
3 Ways to Improve Your Compensation Design Process
1. Design a Structured Compensation Process
Your firm requires a system that can guide managers to align pay with performance and measure return on investment. Higher retention, positive employee engagement and increased productivity are true measures of ROI for an effective compensation strategy. Any compensation system should provide essential data and customisations required to deal with complex compensation plans.
2. Avoid These Mistakes
- Summing unrestricted spending by management without proper oversight
- Establishing a quick, temporary fix without a long-term strategy
- Halting the review of pay processes until other talent processes are complete
- Not reviewing and auditing processes frequently
3. Build a Business Case for Change
Unfair pay practices can have an adverse impact on employee engagement and organisational performance. You must bring in a practical business case that highlights the importance and value of a new compensation system to avoid unequal pay practices at your company.
Creating modern and effective compensation design systems requires savvy compensation managers and HR leaders who can effortlessly present and articulate at all levels. In order to drive business performance through strategic compensation designs, an HR leader or manager must be successful in deploying data-driven salary increases based on merit.
Looking to up your HR game?
Compensation Design and Pay-For-Perfomance 2.0 is a live, classroom-style masterclass by Keynotive that will be held in the vibrant city of Budapest, Hungary!
This engaging two-day session will be conducted by Robert Mosley, Global Remuneration Expert, HR Consultant and CEO of Lemon Pip Consulting.
This masterclass will provide you with the information needed to make changes to your grading and salary structure. You will be able to test various ideas and establish what may work for you and your company. This masterclass will also give you access to various tool and techniques as well as the latest trends and developments related to the topic.
If you are interested in joining our hands-on masterclass, sign up today by clicking here.